Operations

Operations

Operations Update

2014 Second Quarter Update

On the back of the successful exploration activities in Kenya during 2013, the Company and its partners ramped up its exploration program in Kenya and Ethiopia. Entering the year, the Company and its partners had seven drilling rigs operating in the region. Four Tullow-Africa Oil joint venture rigs are operating in the discovered basin in Northern Kenya in Blocks 10BB and 13T, one of which is a testing and completions unit. In addition, the Company and its partner have a rig operating in Block 9 in Kenya. In Ethiopia, the Company and its partners in the South Omo Block and Block 7/8 had rigs operating in each block. Drilling operations in Block 7/8 have been completed, and the rig has been released. Additionally, drilling operations in the South Omo Block have been completed and the rig is being de-mobilized whilst future drilling opportunities are being assessed. The Company expects to have five drilling rigs operating in Kenya through the remainder of 2014.

In January, the Company announced further drilling success with its sixth and seventh consecutive discoveries in the discovered basin in Northern Kenya at Amosing-1 and Ewoi-1. Amosing-1 is located 7 kilometers southwest of the Ngamia-1 discovery along the Basin Bounding Fault Play in Block 10BB. Logs indicated 160 to 200 meters of potential net oil pay in good quality sandstone reservoirs. A down-dip appraisal well with a planned sidetrack is currently being drilled at Amosing-2/2A and with an extended well test planned to start towards the end of the year. Ewoi-1 is located 4 kilometers to the east of the Etuko-1 discovery in the Basin Flank Play on the eastern side of the discovered basin in Northern Kenya also in Block 10BB. Logs indicated potential net pay of 20 to 80 meters. Results of Ewoi-1 testing operations are expected to be announced in the coming weeks.

In February, the Company announced the results of five well tests conducted on five Lokhone pay intervals at Etuko-1 located on the Basin Flank Play in Block 10BB. Light 36 degree API waxy crude oil was successfully flowed from three zones at a combined average rate of over 550 barrels of oil equivalent per day ("bopd"). In March, the Company announced the results of the Etuko-2 exploration well drilled to test the upper Auwerwer sands overlying the previously announced Etuko discovery. Etuko-2 penetrated a potential significant oil column identified from formation pressure data and oil shows while drilling and in core, with good quality reservoir but flowed only water on drill stem test. The results are considered inconclusive and analysis is underway to consider further options to evaluate this reservoir.

In March, the Company announced the results of the Emong-1 well located in Block 13T (Kenya), 4 kilometers northwest of the Ngamia-1 field discovery. The well encountered oil and gas shows while drilling, however the Auwerwer sandstones that are the primary reservoirs in the Ngamia field were thin and poorly developed in Emong-1 and the well was plugged and abandoned. It is believed that the reservoir was poorly developed due to its proximity to the basin bounding fault and its location within what appears to be a local isolated slumped fault margin. This well, which was aimed at establishing an additional play, has no impact on the potential of the Ngamia oil accumulation or any other prospectivity in the discovered basin in Northern Kenya.

Also in March, the Company announced the results of a well test on the Ekales-1 discovery drilled in 2013 and located on the Basin Bounding Fault Play between the Ngamia-1 and Twiga South-1 discoveries. Testing operations on the Ekales-1 well confirmed this significant oil discovery. Two drill stem tests were completed and flowed at a combined rate of over 1,000 bopd from a combined 41 meter net pay interval. The upper zone had a very high productivity index of 4.3 stb/d/psi.

In May, the Company drilled a new prospect in the discovered basin in Northern Kenya, the Ekunyuk-1 well, located on the Basin Flank Play on trend with the Etuko and Ewoi discoveries. The well encountered 5 meters of net oil pay and found 150 meters of good quality Lokhone sands, although there was a lack of trap at this level within the well. The quality of Lokhone sands indicates that there is further exploration potential in this area of the basin.

Also in May, the Company announced the results of the Twiga-2 appraisal well where the initial wellbore was drilled near the basin bounding fault and encountered some 18 meters of net oil pay within alluvial fan facies, with limited reservoir quality. A decision was made to sidetrack the well away from the fault to explore north of Twiga-1 and some 62 meters of vertical net oil pay was discovered in the Auwerwer formation at Twiga-2A, similar in quality to the initial Twiga-1 discovery. Testing at Twiga-2A is expected to commence in August.

In June, the Company announced the results of the Ngamia-2 appraisal well which was drilled 1.7 kilometers from the Ngamia-1 discovery well to test the northwest flank of the field. The well encountered up to 39 meters of net oil pay and 11 meters of net gas pay and appeared to have identified a new fault trap, north of the main Ngamia accumulation. Four to six additional appraisal wells are planned in the Ngamia field area, including the Ngamia-3 well which is currently drilling.

Also in June, the Company drilled the Agete-2 exploratory appraisal well drilled some 2.2 kilometers southeast of Agete-1. The well intersected water bearing reservoirs at this down-dip location and further appraisal drilling is planned. Additionally in June, the Agete-1 well was tested at 500 bopd.

Four rigs are currently operating in the discovered basin in Northern Kenya. The Etom-1 exploration well and the Ngamia-3 and Amosing-2/2A appraisal wells are all currently drilling. Additionally, testing operations are nearing completion at Ewoi-1.

Given the significant volumes discovered and the extensive exploration and appraisal program planned to fully assess the upside potential of the basin, the Tullow-Africa Oil joint venture has agreed with the Government of Kenya to commence development studies. In addition, the partnership is involved in a comprehensive pre-FEED study of the export pipeline. The current ambition of the Government of Kenya and the joint venture partnership is to reach project sanction for development, including an export pipeline, by the end of 2015/early 2016. The governments of Kenya, Uganda and Rwanda have signed a Memorandum of Understanding (MoU) and formed a Steering Committee to progress a regional crude oil export pipeline from Uganda through Kenya. The Kenya upstream partners have also signed a cooperation agreement with the Uganda upstream partners in support of the same objective.
In addition to further exploration and appraisal drilling in the discovered basin in Northern Kenya, the Company and its partners plan to test three new basins in the second half of 2014. Kodos-1 (Block 10BB) will test the Central Kerio Basin, Epir-1 (Block 10BB) will test the North Kerio Basin and Engomo-1 (Block 10BA) will test the North Turkana Basin. Five further basins are planned to be tested by the end of 2015.

At Block 9 in Kenya, the Company announced in May the results of the Sala-1 exploration which tested a large prospect on the northeastern flank of the Cretaceous Anza rift, which is up-dip of two wells that had significant hydrocarbon shows. An upper gas bearing interval tested dry gas at a maximum rate of 6 mmcf/d from a 25 meter net pay interval. The interval had net sand of over 125 meters and encountered as gas-water contact so there is potential to drill up-dip on the structure where the entire interval will be above the gas-water contact. A lower interval tested low rates of dry gas from a 50 meter net pay interval which can also be accessed at the up-dip location. Significant oil shows were also encountered while drilling. The Sala-2 appraisal well located on the crest of the discovery spud in the third quarter. The Company believes there is a very strong market for gas in Kenya and have already engaged in discussions with the Government of Kenya around a fast track gas to power development and discussions are also ongoing around securing PSC gas terms.

At the South Omo Block in Ethiopia, the Company completed drilling of the Shimela-1 exploration well in May to test a new basin in the Tertiary trend, the Chew Bahir Basin, located on the eastern side of the block, but the well encountered water bearing reservoirs and volcanics with trace gas shows. In July, the Company completed drilling of the Gardim-1 exploration well on the eastern flank of the Chew Bahir Basin. The Gardim-1 well intersected lacustrine and volcanic formations, similar to those found in the Shimela-1 well, again minor intervals encountered gas shows. Drilling operations are being demobilized while these results are integrated into the regional basin model. Seismic interpretation continues on independent prospectivity elsewhere in the South Omo Block and the next phase of the Ethiopia exploration campaign will target these prospects.

Additionally in Ethiopia, the Company and its partners completed the drilling of the El Kuran-3 appraisal well on Block 8 in the first half of the year. El Kuran-3 was an appraisal of a discovery made by Tenneco in the 1970's, and encountered a significant but tight gas-condensate zone in Jurassic Hammanlei carbonates. The well was suspended pending further evaluation. Options regarding the future of the blocks are being evaluated.

The Company and its partners continue to actively acquire and process seismic data in Blocks 12A, 10BA, 10BB and 13T in Kenya. In Block 12A, a 674 kilometer 2D seismic program was completed in the first quarter and the crew has demobilized. In Block 10BB, a 750 kilometer North Kerio Basin 2D seismic program was completed in the first quarter and the crew is mobilizing to acquire a 600 kilometer 2D program split between Blocks 10BA, 10BB and 13T over the North Lokichar Basin. In Blocks 10BB and 13T, acquisition of a 550 square kilometer 3D seismic program over the discoveries and prospects along the Basin Bounding Fault Play in the discovered basin in Northern Kenya is ongoing and is scheduled to complete in the fourth quarter. The Company and its partner intend to extend the current 3D seismic program. In Ethiopia, the Company, as operator, and its partner are making preparations to acquire a minimum 400 kilometer 2D seismic program over the Rift Basin Area commencing in the fourth quarter. Also in Ethiopia, the Company and its partners continue to acquire a 1,000 kilometer 2D seismic program on the Adigala Block.

In September 2013, the Company announced details of an independent assessment of the Company's contingent and prospective resources on its Kenyan and Ethiopian exploration properties. The Company is currently working with its independent resource evaluator and expects to release an update to the contingent and prospective resources for the discovered basin in Northern Kenya in Blocks 10BB and 13T during the third quarter.

The Company has a significant exploration and appraisal program set out for 2014 which will see over 20 wells completed. The program is focused on drilling out the remaining prospect inventory in the discovered basin in Northern Kenya, appraising existing and future discoveries with the aid of the new 3D seismic survey, drilling three new basin opening wells in the second half of the year and progressing the development studies towards project sanction in the discovered basin in Northern Kenya. This significant exploration program in 2014 is fully funded.

KENYA

The Company and its partners in the Kenyan blocks are actively exploring for oil as described below.

Block 10BB
On the back of the very successful exploration results in the discovered basin in Northern Kenya, the Company and its partner have accelerated the pace of exploration along the Basin Bounding Fault Play in Block 10BB and Block 13T. The Company and its partner currently have four drilling rigs operating in the discovered basin in Northern Kenya, one of which is a testing and completion rig.

In January, the Company announced further drilling success with its sixth and seventh consecutive discoveries in the discovered basin in Northern Kenya at Amosing-1 and Ewoi-1. Amosing-1 is located 7 kilometers southwest of the Ngamia-1 discovery along the Basin Bounding Fault Play in Block 10BB. Logs indicated 160 to 200 meters of potential net oil pay in good quality sandstone reservoirs. A down-dip appraisal well and planned sidetrack is currently being drilled at Amosing-2/2A with an extended well test planned towards the end of the year. Ewoi-1 is located 4 kilometers to the east of the Etuko-1 discovery in the Basin Flank Play on the eastern side of the discovered basin in Northern Kenya also in Block 10BB. Logs indicated potential net pay of 20 to 80 meters to be confirmed by well testing which is nearing completion.

In February, the Company announced the results of five well tests conducted on five Lokhone pay intervals at Etuko-1 located on the Basin Flank Play in Block 10BB. Light 36 degree API waxy crude oil was successfully flowed from three zones at a combined average rate of over 550 bopd. In March, the Company announced the results of the Etuko-2 exploration well drilled to test the upper Auwerwer sands overlying the previously announced Etuko discovery. Etuko-2 penetrated a potential significant oil column identified from formation pressure data and oil shows while drilling and in core, with good quality reservoir but flowed only water on drill stem test. The results are considered inconclusive and analysis is underway to consider further options to evaluate this reservoir.

In May, the Company drilled a new prospect in the discovered basin in Northern Kenya, the Ekunyuk-1 well, located on the Basin Flank Play on trend with the Etuko and Ewoi discoveries. The well encountered 5 meters of net oil pay and found 150 meters of good quality Lokhone sands, although there was a lack of trap at this level within the well. The quality of Lokhone sands indicates that there is further exploration potential in this area of the basin.

In June, the Company announced the results of the Ngamia-2 appraisal well which was drilled 1.7 kilometers from the Ngamia-1 discovery well to test the northwest flank of the field. The well encountered up to 39 meters of net oil pay and 11 meters of net gas pay and appeared to have identified a new fault trap, north of the main Ngamia accumulation. Four additional to six additional appraisal wells are planned in the Ngamia field area, including the Ngamia-3 well which is currently drilling.

Down-dip appraisal wells are currently drilling at Ngamia-3 and Amosing-2/2A. Results from these wells are expected in August.

The 2D seismic crew operating in Block 10BB completed 750 kilometers of 2D seismic during the first quarter. Fast-track processing of this newly acquired survey is being integrated into subsurface mapping to finalize exploration drilling locations for the 2014 campaign, the first of which will be the basin opening test of the Kodos prospect in the Central Kerio Basin which is expected to spud the third quarter. This 2D seismic program identified a significant number of follow-on prospects should Kodos be successful. The seismic crew is now mobilizing to the North Lokichar Basin for an infill program that will further define prospects for the 2015 drilling campaign. Using a second crew, the Company and its partner have completed approximately 50% of a 550 square kilometer 3D seismic survey that covers the Amosing, Ngamia, Ekales, Twiga South and Agete discoveries along the Basin Bounding Fault Play in Block 10BB and Block 13T combined.

The Company and its partner exceeded the minimum work and financial obligations of the first additional exploration period which expired in July 2014. The second additional exploration period includes a commitment to drill three wells and acquire 250 square kilometers of 3D seismic

Block 13T
In March, the Company announced the results of the Emong-1 well in Block 13T (Kenya) located 4 kilometers northwest of the Ngamia-1 field discovery. The well encountered oil and gas shows while drilling, however the Auwerwer sandstones that are the primary reservoirs in the Ngamia field were thin and poorly developed in Emong-1 and the well was plugged and abandoned. It is believed that the reservoir was poorly developed due to its proximity to the basin bounding fault and its location within what appears to be a local isolated slumped fault margin. This well, which was trying to establish an additional play, has no impact on the potential of the Ngamia oil accumulation or any other prospectivity in the discovered basin in Northern Kenya.

Also in March, the Company announced the results of a well test on the Ekales-1 discovery drilled in 2013 and located on the Basin Bounding Fault Play between the Ngamia-1 and Twiga South-1 discoveries. Testing operations on the Ekales-1 well confirmed this significant oil discovery. Two drill stem tests were completed and flowed at a combined rate of over 1,000 bopd from a combined 41 meter net pay interval. The upper zone had a very high productivity index of 4.3 stb/d/psi.

In May, the Company announced the results of the Twiga-2 appraisal well where the initial wellbore was drilled near the basin bounding fault and encountered some 18 meters of net oil pay within alluvial fan facies, with limited reservoir quality. A decision was made to sidetrack the well away from the fault to explore north of Twiga-1 and some 62 meters of vertical net oil pay was discovered in the Auwerwer formation at Twiga-2A, similar in quality to the initial Twiga-1 discovery. Testing Twiga-2A is expected to commence in August.

In June, the Company drilled the Agete-2 exploratory appraisal well drilled some 2.2 kilometers southeast of Agete-1. The well intersected water bearing reservoirs at this down-dip location and further appraisal drilling is planned. Additionally in June, the Agete-1 well was tested at 500 bopd.

The Etom-1 exploration well, the next Basin Bounding Fault Prospect north of the Agete oil discovery, is currently drilling and results are expected in August.

The Company and its partner have completed approximately 50% of the 550 square kilometer 3D seismic survey that covers the discoveries and prospects along the Basin Bounding Fault Play in Block 10BB and Block 13T combined. Using a second crew, the plan is to acquire an additional 200 kilometers of 2D seismic over the block during 2014 to define prospects in the North Lokichar Basin.

The current exploration phase under the Block 13T PSC, which expires in September 2014, includes a commitment to drill one exploratory well, which was satisfied with the drilling of Twiga South-1, and a commitment to acquire 200 square kilometers of 3D seismic. The planned work program in Block 13T will exceed the PSC commitment. The intention of the Block 13T partners is to enter the final two year exploration period under the PSC.

Block 10BA
During the first quarter, the Company and its partner on Block 10BA demobilized a seismic crew that completed a 1,450 kilometer 2D seismic program in 2012/2013. The plan in 2014 is to acquire a further 200 kilometers of 2D seismic in the North Lokichar Basin that extends onto Block 10BA. Preparations are underway to drill two exploration wells in the North Turkana Basin commencing with the Engomo prospect, which is expected to spud in the fourth quarter of this year. The 2D seismic acquired to date exceeds the work obligations of the initial exploration period under the Block 10BA PSC which expired in April 2014. The Company and its partner have elected to enter the next two year exploration period under the PSC.

Block 12A
The Company and its partners on Block 12A have recently completed a 676 kilometer 2D seismic acquisition program that began in 2013. The 2D seismic program is mainly focused in the Kerio Valley in the southwestern portion of the block. The 2D seismic acquired to date exceeds the work obligations of the initial exploration period under the Block 12A PSC which expires in September 2014. The Company and its partners have requested the Ministry of Energy in Kenya's permission to enter the first additional exploration period under the PSC.

Block 9
At Block 9 in Kenya, the Company announced in May the results of the Sala-1 exploration which tested a large prospect on the northeastern flank of the Cretaceous Anza rift, which is up-dip of two wells that had significant hydrocarbon shows. An upper gas bearing interval tested dry gas at a maximum rate of 6 mmcf/d from a 25 meter net pay interval. The interval had net sand of over 125 meters and encountered as gas-water contact so there is potential to drill up-dip on the structure where the entire interval will be above the gas-water contact. A lower interval tested low rates of dry gas from a 50 meter net pay interval which can also be accessed at the up-dip location. Significant oil shows were also encountered while drilling. The Sala-2 appraisal well located on the crest of the discovery spud in the third quarter. The Company believes there is a very strong market for gas in Kenya and have already engaged in discussions with the Government of Kenya around a fast track gas to power development and discussions are also ongoing around securing PSC gas terms. The Company and its partner are currently in the final exploration period under the PSC which expires in December 2015. All PSC work commitments have been completed.

ETHIOPIA

South Omo Block
In May, the Company completed drilling of the Shimela-1 exploration well to test a new basin in the Tertiary trend, the Chew Bahir Basin, located on the eastern side of the South Omo Block, but the well encountered water bearing reservoirs and volcanics with trace gas shows.

In July, the Company completed drilling of the Gardim-1 exploration well on the eastern flank of the Chew Bahir Basin. The well intersected lacustrine and volcanic formations, similar to those found in the Shimela-1 well, again minor intervals encountered gas shows. Drilling operations are being demobilized while these results are integrated into the regional basin model. Seismic interpretation continues on independent prospectivity elsewhere in the South Omo Block and the next phase of the Ethiopia exploration campaign will target these prospects.
The current exploration period under the PSC expires in January 2015 and the work completed on the block to date has exceeded the minimum work obligation.

Rift Basin Area
The Rift Basin Area is located north of the South Omo Block and is on trend with highly prospective blocks in the Tertiary rift valley including the South Omo Block in Ethiopia, and Kenyan Blocks 10BA, 10BB, 13T, and 12A. The Company completed the acquisition of a 36,500 line kilometer Full Tensor Gradiometry ("FTG") survey in October 2013. The Company has completed an exhaustive environmental and social impact assessment over the block in preparation for a 400 to 1,200 kilometer 2D seismic program, which will commence in the fourth quarter. The initial exploration period, which expires in February 2016, will be met by the planned work program.

Ogaden Blocks 7/8
The Company and its partners completed the drilling of the El Kuran-3 appraisal well on Block 8 in the first half of the year. El Kuran-3 was an appraisal of a discovery made by Tenneco in the 1970's, and encountered a significant but tight gas-condensate zone in Jurassic Hammanlei carbonates. The well was suspended pending further evaluation. Options regarding the future of the blocks are being evaluated

Adigala Block
As part of work obligations for the second exploration period which expired July 2013, the Company and its partners incorporated newly acquired FTG data with seismic data to improve the subsurface interpretation of the block. The Company and its partners also integrated results of recent surface geological studies and reprocessed data acquired in 2009 with the goal of improving the data quality. The parties to the block agreed to enter the final exploration period under the PSC, which expires in July 2015 and carries a 500 kilometer 2D seismic work commitment. The Company and its partners have committed to a 1,000 kilometer 2D seismic program which is underway. The Company has farmed down its interest in the Adigala Block to 10%.

PUNTLAND (SOMALIA)

Dharoor Valley and Nugaal Valley Blocks
The Company continues to evaluate the encouraging results of the two wells drilled in 2012 on the Dharoor Valley block which proved all the critical elements exist for oil accumulations, namely a working petroleum system, good quality reservoirs and thick seal rocks. Based on these encouraging results, the Company committed to enter the next exploration period in each block, which carries a commitment to drill one exploration well in each block within an additional three year term ending October 17, 2015. Our work moving forward can be categorized into three main areas; technical, operational and political.

Efforts are now focused on making preparations for a seismic acquisition campaign in the Dharoor Valley area which will include a regional seismic reconnaissance grid in the previously unexplored eastern portion of the basin as well as prospect specific seismic to delineate a drilling candidate in the western portion of the basin where an active petroleum system was confirmed by the most recent drilling at the Shabeel-1 and Shabeel North-1 locations. The Company has identified a suitable location to drill an exploration well in the Nugaal Valley block. However, given certain operational and political issues identified below, a decision to move ahead on this will not be taken until adequate resolution is achieved.

The Company continues to assess the operating environment in each block from logistical, community and security perspectives. These assessments will provide critical information required to plan operations in the Company's exploration areas.

There have been some significant political changes in both Somalia and the Regional State of Puntland over the last couple of years that are shaping the climate in which the Company operates. At the Federal level, the new Somali Government took power in August 2012 as the first permanent central government in the country since 1991. While internationally recognized and supported, it is still fragile and faces many challenges both politically and security wise. In January 2014, a new President of Puntland was voted in and the transfer of power took place peacefully. Management is working closely with him and his emerging new government to take forward a range of key issues that impact our operations.
Key amongst these are the legitimacy of oil concession contracts issued by former and present central Somali governments and the Regional States (Puntland and Somaliland), many of which cover overlapping territory; and the border dispute between Somalia (including Puntland) and Somaliland (which overlaps a proportion of our Nugaal block).

Additionally, Horn is reviewing new venture opportunities in the region.